:: HMO Loses Third Party Beneficiary Contract Dispute With Health Care Providers

HOI’s own records admitted into evidence at trial demonstrated that HOI (a) sought to save itself $4.1 million annually by discontinuing these payments to clinical pathologists, (b) anticipated that litigation would follow that action, and (c) recognized that Medicare and Medicaid had established payment amounts that included the disputed component for the pathologists’ supervision and oversight of the clinical laboratories.

Health Options, Inc. v. Palmetto Pathology Services, P.A., 2008 WL 1733673 (Fla.App. 3 Dist.) (April 16, 2008)

In this health care provider versus HMO dispute, the providers chalked up a win. Having successfully moved for remand following the HMO’s attempt to convert the payment controversy into an ERISA action, the HMO asserted ERISA preemption as an affirmative defense. The trial court, and subsequently, the appellate court, found this defense unavailing.

The Facts

The plaintiffs were a group of medical doctors, board-certified pathologists, and their employees (”PPS”). PPS and the HMO (”HOI”) had a written agreement regarding the price of medical services through 1999. In 1999, however, the HMO refused to continue paying for one component of the services.

As to the services:

The evidence at trial demonstrated that the disputed services are recognized by the American Medical Association’s Current Procedural Terminology Editorial Panel as a discrete component of the work done by hospital clinical pathology laboratories. That group describes the disputed services as nine specific and enumerated categories of activity, including quality control, record keeping, the establishment of protocols and test methodologies, supervision, the assurance of compliance with regulatory requirements, and supervision of technicians and other staff.

The Dispute

HOI contended that it had no responsibility to pay for this component of the services, maintaining that its contract with the hospitals fixed the amount payable by HOI for the in-hospital pathology services rendered to members.

This refusal to pay put the providers in a bind as follows:

The hospitals are not parties to the lawsuit. They have agreed not to directly bill HOI’s members, and they receive stipulated payments for the pathology lab work done for the members by PPS’s in-hospital laboratories. Again, however, those stipulated payments did not include a component for reimbursement of PPS’s disputed services.

As a “non-participating provider” of these services, PPS was nonetheless prohibited (by section 641.3154(4), Florida Statutes (2007)) from directly billing HOI’s members if PPS knew or should have known that HOI was liable for payment. As to the disputed services, therefore, PPS was not being paid by the hospitals, could not collect from HOI’s members, and was not being reimbursed by HOI.

HMO Liable

The arguments against payment were sundry and complex. Nonetheless, they were unavailing.

For example:

HOI is correct that Florida’s “Health Maintenance Organization Act,” sections 641.17-.3923, Florida Statutes (2005), does not provide a private statutory right of action for damages stemming from a violation of one of the Act’s provisions. See Villazon v. Prudential Health Care Plan, Inc., 843 So.2d 842, 852 (Fla.2003). However, Florida courts have not precluded medical providers from bringing common law claims against an HMO where the claim is based on allegations that the HMO violated provisions of Florida’s HMO Act. Found. Health, 944 So.2d at 194; see Villazon, 843 So.2d at 852.

And again, on this technical issue:

HOI next contends that “approved physician care” does not extend to the disputed services when pathologists do not examine a patient or review patient-specific lab work. We disagree.

“Physician care,” as that term is defined by Florida law, is the “care, provided or supervised by physicians … and shall include consultant and referral services by a physician.” Fla. Admin. Code R. 69O-191.024(13)(c) (emphasis added). The record here demonstrates that the disputed services include supervisory duties, consultations, and referrals by the physician pathologists.

Historically, subsection 69O-191.049(2) replaced Florida Department of Insurance Bulletin 90-022.FN8 The bulletin provided: “HMOs should reimburse ancillary providers for covered professional services rendered directly to the HMO member” (emphasis added). In 1992, what is now Rule 69O-191.049(2) removed and thereby rejected the word “directly.” See Don King Prods., Inc. v. Chavez, 717 So.2d 1094, 1095 (Fla. 4th DCA 1998) (finding that a legislature’s deletion of a word from a statute is evidence that the word has been rejected). Thus, PPS’s medically necessary clinical pathology services “rendered to” (not “rendered directly to”) a member are compensable whether or not a pathologist and patient meet directly.

Third Party Beneficiary Contract

A more interesting part of the opinion relates to the issue of standing. On this key point, the court observed that the Florida Supreme Court had recognized that the medical providers were intended third party beneficiaries of contracts between an HMO and its members.

The [Florida Supreme] Court accepted the principle that when parties enter into a contract regarding a matter which is the subject of statutory regulation, those regulatory provisions become a part of the contract.

Third Party Beneficiary Contract Analysis

In order to prevail on its claims, PPS had to prove that it was an intended third-party beneficiary of the HOI-member contracts.

The elements of such a claim are:

  1. existence of a contract;
  2. the clear or manifest intent of the contracting parties that the contract primarily and directly benefit the third party;
  3. breach of the contract by a contracting party; and
  4. damages to the third party resulting from the breach.

Networkip, LLC v. Spread Enters., Inc., 922 So.2d 355, 358 (Fla. 3d DCA 2006).

The trial court correctly concluded that PPS established these elements. There is no dispute that a contract existed between HOI and its members, and that the contract was intended to directly benefit medical providers rendering services to HOI’s members. Likewise, the evidence was undisputed that PPS rendered medically necessary tests and services for which it was not fully paid. HOI and the members agreed to provide this benefit so that, for example, medical providers would not directly bill the members for the medical services. . . . It is sufficient to say that HOI was liable here, and we affirm the trial court.

Note: The seminal Florida case on the third party contract issue in the HMO contract is Found. Health v. Westside EKG Assocs., 944 So.2d 188, 193-94 (Fla.2006).

In Foundation Health, the Florida Supreme Court recognized that the medical providers in that case were intended third party beneficiaries of contracts between an HMO and its members. Westside, a group of physicians administering EKG interpretations in addition to other services, claimed that an HMO breached its contracts with members by failing to pay for services rendered by the physicians (who were, as here, non-participating providers). The Court accepted the principle that when parties enter into a contract regarding a matter which is the subject of statutory regulation, those regulatory provisions become a part of the contract. Id. at 195